Market Focus Ahead: Observations from the Skeptical Banker

My friend David1969, as he calls himself on the site I've known him from, is a banker and financial advisor with one of the regional banks in the Midwest. He's decided to share his current observations on the markets (his number references are to the S&P 500), where the markets are now and what probably lies ahead:

Some observations...

I want to preface my comments by letting anyone who reads this know that I am more of a swing trader. I will get involved with short term trades, but I like to take positions for a few days if not a week or so. So please understand these comments are not to be viewed in terms of what may happen this Tuesday necessarily.

I do have a small long I am carrying over the weekend, to provide my potential bias if there is one short-term.

I feel getting back above the 857 area in the S&P 500 (not an exact number) and seeing that area as support would make me more bullish. However as others traders are pointing out, the .618 to .707 retrace of the move down from 942 to 818 is around that area as well. So a safer play would probably be to get above the 875 area and see it used as support.

My goal is to catch the next broader move, and to that extent, I feel we are about to be told by the market what it has in mind. Many traders I talk with have accurately pointed out that many markets are at critical junctures ... and soon the direction will be seen.

I see great value obviously in buying at support at the 815 area, and selling at resistance at the 857 to 875 area. On the daily level, we sit between two areas of support and resistance: 815 to 875. Just like a daytrader who avoids taking a position when the market is in-between important levels, I see no reason to be aggressive as a swing trader unless we are near one of those areas.

I suppose a short could have been taken Friday as we are near the 857 area ... but with the long weekend, it would have been with risk obviously more so than on a normal day.

Options expirations (OPEX) just wrapped up and we may have seen our trade cycle low based on price action Friday. What will be interesting is how the market acts Tuesday, after the holiday, given that Friday seemed somewhat muted by OPEX.

Questions I have about Friday's action: was the market just pausing its move down in acknowledgement of OPEX/Friday? Or was the move from 942 down to 818 just a function of the OPEX and the bank issues and the market is resetting itself to move higher beyond 942?

At the still broader weekly to monthly level, the Government needs to find a solution to the banks which can wash the system clean once and for all of the financial sector downside momo [momentum] and let the market reset. So I see lower prices at the broader level, before a move up, until the new administration patches the banks sufficiently. Then we can look to say Dom's old 1060 number for the S&P 500.
[Dom was a trading mentor that David and I shared, an incredibly talented analyst and trader who passed away suddenly in October. Dom is who I've dedicated this site to.]

However even once the bank piece of the puzzle is known, the next question is the broader economy. So, I feel any broader based rally in the coming weeks will then lead to another wave down later in the year as other industries contract even more rapidly, bankruptcies rise, and credit tightens further regardless of what the FED does. Besides, as someone who is in banking, unless Bernanke gets over the shoulders of our lenders - I can tell you that the banks are not about to lend money to someone who has a bleak economic future staring them in the face.

Caution is in order for bulls, in my humble opinion.

David
Peace